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Local super funds embrace class actions

Securities litigation is not just a way to recover money that legally belongs to members, it’s also an investment opportunity, says Steven Longley, senior vice-president, corporate development at Financial Recovery Technologies (FRT).

Speaking as part of a panel at the 2018 Investment Magazine Investment Operations Conference, Longley said recovery should not focus just on litigation. He argued that securities action could also be a marketable asset that could be sold.

“We have developed a fund where interested groups can consolidate the exposure, and fraud, and sell it on secondary markets. The returns have been quite material,” he said. “It’s about the maximisation of every recoverable opportunity.”

FRT is a technology-based services firm that helps institutional investors identify eligibility, file claims and collect funds made available in securities class actions.

While the majority of class actions are in the US, more Australian investors are starting to investigate the appropriateness for their funds. In a session chaired by Robert Poulter, program director, ASO transformation at NAB Asset Servicing, a panel debated whether it is good governance to participate in class actions in Australia.

A poll of the participants found 58 per cent of organisations have a defined protocol in their governance model for class actions.

Also speaking on the panel was Tom May, general counsel and company secretary at Australian Ethical Investments, which is one of those investors actively participating in class actions.

May said owners of assets have a duty to collect those that belong to the fund.

“Class actions are a lay down misere from our point of view,” he said. “A legal action is a piece of property you need to collect, and it is a simple and easy process. It’s like money for nothing. Not turning your mind to it is a failure.”

Jeff Lubitz, executive director and head of securities class action services at ISS, said it was a great opportunity to recover a significant amount, and a business development opportunity. He said the potential assets available for recovery are incredibly significant.

ISS Securities class action services reported that it identified 162 approved securities class-action settlements in the US in 2017, which Lubitz said represented a relatively disappointing figure in terms of dollars. However, it also reported that while the volume of approved settlements worth greater than $100 million each was low, the number of new cases filed in 2017 was significantly higher than in the previous year.

Further, a case against Petrobras includes a US$2.95 billion ($3.76 billion) settlement; subject to final court approval, it will be the fifth-largest ever, behind Enron, WorldCom, Cendant and Tyco.

For investors, the cost for participation in securities action varies from case to case but for the most part, ISS doesn’t get a cut of the settlement; rather, clients pay an annual flat fee.

There are other fee models. IMF Bentham, which is a litigation funder listed on the ASX since 2001, charges a percentage fee on resolved cases.

Clive Bowman, chief executive Australia and Asia at IMF Bentham, said that of the cases it funds, on average, the claimant receives 60 per cent from a resolution, and 40 per cent goes to the funder and legal fees.

“It’s not a question of whether to join an action but of how to go about getting the best deal for your members, and what considerations matter,” Bowman said.

FRT’s Longley said there were quite a few considerations and options presented to investors in funding agreements that affect how much the investor recovers. In particular, the reputation and experience of the funder is paramount.

But Australian Ethical’s May said that in his experience there is no downside to participating in class actions.

“We have thought through all of these things and looked at the quality of the parties involved,” he said. “It’s a few basis points – but it’s worth chasing.”

ISS’s Lubitz said from a reputational point of view the recovery of the assets is a good story at the end of the day.

“Because losses have already been incurred in years past, anything you can get today can be added back in,” he said. “From a reputational standpoint, that’s a good story to share.”

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Investment Magazine provides in-depth, monthly analysis of trends and developments for all the businesses in which superannuation funds engage‚ including asset allocation, investment manager selection, custody and fund accounting, member administration, group insurance and compliance.